Description

Background

Midea Group is a leading home appliance manufacturer, specializing in a diverse range of products such as refrigerators, washing machines, air conditioners, kitchen appliances, and smart home solutions. With a global presence spanning over 200 countries and regions, Midea has established a reputation for manufacturing high-quality, innovative products that cater to consumer needs. Aside from home appliances, Midea has also strategically positioned in robotics and automation to ensure its sustainable future growth. Midea’s market leadership, lean operation, sustained growth and effective capital allocation have enabled the company to consistently earn a high Return on Equity (ROE), delivering values for shareholders.

Midea Revenue Mix in 2022

Source: Company

Market Leader and Valuable Brand

Midea's strong market position and brand recognition have been instrumental in its high ROE. The company's trusted brand name, coupled with a diverse product portfolio, allows Midea to gain market share in China and expand into new international markets. Midea offers a diverse range of home appliances, catering to various consumer needs. Its extensive product portfolio includes refrigerators, washing machines, air conditioners, kitchen appliances, and smart home solutions. This breadth of offerings allows Midea to cater to a wide customer base and capture market share across different product categories. The ability to provide a one-stop solution for consumers' home appliance needs enhances Midea's competitiveness in the industry. In addition, Midea has built a strong brand and reputation in the home appliance industry. The company is widely recognized for its commitment to quality, reliability, and customer satisfaction. In fact, Midea ranked #35 in the annual Kantar BrandZ Most Valuable Chinese Brands in 2022, the highest among home appliance companies. Midea's brand equity gives it a competitive edge, allowing the company to command consumer trust and loyalty. This strong brand recognition provides a foundation for market leadership and supports its ability to capture market share.

Midea Ranks #35 in 2022 Most Valuable Brands in China

Source: Kantar BrandZ Most Valuable Chinese Brands 2022

Operational Efficiency
Midea has excelled in optimizing its operations, leading to improved profitability and higher ROE.

For example, Midea was the first in the industry to shift from the tried and true Make-to-Stock (MTS) model to the innovative T+3 model. Historically, AC companies including Gree and Midea adopted the MTS model to fully utilize distributors' storage and capital to smooth out demand seasonality and improve capacity utilization. However, the benefits of MTS model diminished as sales growth slowed down and the model was at a disadvantage in the face of increasing online sales. Midea in 2018 introduced the T+3 model, which was effectively a just-in-time production model, producing a quantity of goods based on sales projection. This transformation shortened the production cycle, hence reducing working capital. It also reduced the channel costs, allowing Midea to return some of the benefits to end consumers by lowering the retail prices, further enhancing their competitive advantages.

Midea T+3 Model Illustration

Source: Company, UBS

Sustainable Growth

Midea’s continued diversification and expansion of categories and geographies ensure the company’s sustainable growth in the long term. 
In terms of geography expansion, we believe Midea's international expansion provides ample growth opportunities. As emerging markets experience economic growth and an increasing middle class, the demand for home appliances is expected to surge. Midea's established global presence and ability to adapt to diverse consumer preferences make it well-suited to capitalize on these opportunities and drive future revenue and profit growth.

On the category side, Midea's acquisition of Kuka, a leading global supplier of intelligent automation solutions, enhances its competitive advantages in the long run. Kuka's expertise in robotics and automation complements Midea's existing capabilities in home appliances. The acquisition allows Midea to leverage Kuka's advanced robotics technology and integrate it into their manufacturing processes, enhancing efficiency, precision, and automation. This technological synergy enables Midea to optimize production, reduce costs, and improve product quality, thereby gaining a competitive advantage over rivals who may not have similar automation capabilities. Furthermore, the acquisition of Kuka enables Midea to diversify its product portfolio beyond traditional home appliances. By integrating Kuka's robotics and automation solutions, Midea can expand into new sectors such as automotive, healthcare, logistics, and more. This diversification reduces Midea's reliance on a single industry and broadens its revenue streams, mitigating risks associated with fluctuations in the home appliance market. It also positions Midea for growth in industries where automation and robotics play a crucial role. While the initial investments outlays from the expansion might negatively impact profitability in the short term, the new business lines and the international operations should help solidify Midea’s leadership position and pave the way for a sustainable growth path.

Return on Equity of Major Home Appliance Companies

Source: Bloomberg

Effective Capital Allocation

Midea's prudent capital allocation has been instrumental in sustaining its high ROE.  For example, despite a challenging operating environment in 2022, Midea managed to increase the dividend payout ratio, now one of the highest among major home appliance peers. Increasing the payout ratio allows Midea to distribute excess cash to shareholders, reducing the amount of retained earnings on its balance sheet. This reduction in retained earnings can improve the company's capital efficiency by preventing the accumulation of idle or underutilized capital. A more efficient use of capital leads to a higher ROE, as shareholders' equity is better employed in generating returns for investors.

Dividend Payout Ratios of Major Home Appliance Companies

Source: Bloomberg

Valuation

Based on Midea's robust financial performance, sustained high ROE of 20+%, and promising growth prospects, the company appears to be an attractive investment opportunity.  

However, the weak recovery of China consumption and the dim outlook of property sector have weighed on the valuations of home appliance sector indiscriminately. Midea’s PE valuation is trading below both its own historical average and that of many of its peers despite the promising prospects we have outlined above. We believe Midea's ROE of 20+% deserves at least 2.5x P/B on forward-looking basis, which should translate into a minimum target px of Rmb66 stock in 12 months, or 15% minimum return  - plus you get 4-5% dividend on annual basis, therefore total return for next 12Ms would be 20%. 

Valuation Comparison

Source: Bloomberg

Catalyst

 Potential macro turnaround in China, with or without property policy stimulus.